Federal Vs Private Student Loans

December 4, 2011 – 10:23 am

Today, student loans are one of the most common sources of debt, especially for the younger generation. The way many loans offered to college students are structured, it does not typically become an issue until you graduate from school, making it very easy to run up a large amount of debt, without thinking about it too much.

It is quite common for people to make use of a long term loan to pay for their education, some more than others. For example, the average graduating doctor has between $50,000 to $100,000 dollars of debt, the moment they graduate. This isn’t to suggest that Student Loans are always bad, because there are a number of cases where they facilitate a persons education. However, starting out your working career deep in debt is not necessarily a good thing either.

Private Student Loans vs Government Student Loans

One of the most important distinctions between student loans are Private loans vs Government Loans, which typically are backed by the Federal Government. Federal backed loans are often easier to get, with both a break from having to pay interest and no requirement for a cosigner. Federal loans are also guaranteed, whereas if you take out a private loan and the bank closes, you would be out of luck.

A Look at Federal Student Loan Options

Subsidized loans are often available from the government, which have a grace period during school, where the student does not need to pay interest, as well as often a period after graduation, where no interest is charged. The interest rate tends to be better than average, however, most can change from time to time.

Where a federal subsidized loan is typically based on the persons need, an unsubsidized student loan is available to anyone, but does not have the same grace period for interest.

The above loans are typically called Stafford Loans and are available from the government. Perkins Loans, are a different type of loan that is available from the school, which typically offer a period where after the student graduates, they do not have to pay any interest.

A Look at Private Student Loan Options

Typically, a government or school loan will offer the best terms and often provide a grace period where the person is not in school, but does not have to pay any interest. Private loans are also available and offered by many banks and even certain lenders, who primarily focus on student loan financing.

A big disadvantage to this type of loan is that there is usually no grace period while in school, where you can avoid monthly payments or interest. Instead, the loan is treated similarly to other types of bank loans and has similar rules. When at all possible, private student loans should be avoided and are treated very similar to how a credit card loan works.


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